The Government had wanted councils to combine resources in order to cover the costs of core infrastructure projects such as water, sewerage and roading. Some small councils have run into trouble in recent years while developing major infrastructure schemes such as wastewater, which has led to rates blow-outs and central Government intervention.
But the Government's proposed changes stirred strong opposition from some mayors, a group of whom took the rare step of making a joint submission in opposition to the bill.
Local Government President Lawrence Yule told a select committee earlier this month that there was deep concerns about giving power to the commission to establish Council Controlled Organisations (CCOs) without the agreement of the affected local councils.
These concerns prompted United Future leader Peter Dunne to pull his support for the bill, meaning it would not have had the numbers to pass into law.
Lotu-Iiga said today that it was "imperative" that steps were still put in place to ensure that big infrastructure projects were well-managed.
But he acknowledged the concerns raised by councils, and conceded that solutions needed to be found that "promote local democracy".
"I look forward to further discussions with the local government sector to explore options and solutions for the issues that have been raised," he said.
Labour's local government spokesman Meka Whaitiri said the minister should have gone further and dumped the "doomed" bill altogether.
"This is an absolute admission by the Minister that this almost universally panned bill is fundamentally flawed and needs a massive overhaul.
"Local Government New Zealand and nearly every mayor and council in the country is opposed to this Bill, because of its provisions which undermine local democracy and decision-making."
Prime Minister John Key hinted last month that the reforms could be delayed or dropped, saying that he would not "die in a ditch" over the changes.
